Q3 Starts Off Positively, but Markets Notch Weekly Losses…..

U.S. equities started Q3 off on a high note, rallying from the lows of the day to finish in the plus column. However, it wasn’t enough to keep the major indexes out of negative territory for the week. The moves came as the global markets continued to grapple with recession uncertainty, which has ramped up as monetary policies tighten and economic data has suggested slowing activity. The economic calendar showed that manufacturing activity continued to slow in June, while construction spending unexpectedly dipped in May. Treasuries rose, with yields at the short-end noticeably lower, and the U.S. dollar was higher, while crude oil prices gained solid ground and gold was nearly flat. In equity news, Micron Technology topped earnings estimates but its guidance came in well below expectations, Kohl’s Corporation fell after calling off takeover negotiations with Franchise Group, and GM issued mixed guidance. Europe turned to the upside in late action to finish mostly higher, while Asia was broadly lower.

The Dow Jones Industrial Average gained 322 points (1.1%) to 31,097, the S&P 500 Index increased 40 points (1.1%) to 3,825, and the Nasdaq Composite advanced 99 points (0.9%) to 11,128. In moderate volume, 4.0 billion shares of NYSE-listed stocks were traded, and 4.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.67 to $108.43 per barrel. Elsewhere, the gold spot price inched $0.30 higher to $1,807.60 per ounce, and the Dollar Index gained 0.5% to 105.15. Markets were lower for the week, as the DJIA lost 1.3%, the S&P 500 decreased 2.2%, and the Nasdaq Composite fell 4.1%.

The June Institute for Supply Management (ISM) Manufacturing Index showed manufacturing growth (a reading above 50) slowed more than expected. The index declined to 53.0 from May’s 56.1 level, and versus the consensus Bloomberg estimate of a decrease to 54.5. The softer-than-expected report came as new orders fell into contraction though production growth accelerated slightly, along with inventories. The contraction in employment accelerated, but supplier delivery times improved. Inflation pressures moderated but remained severely elevated, with prices paid decreasing to 78.5 from 82.2.

The ISM said, “The U.S. manufacturing sector continues to be powered—though less so in June—by demand while held back by supply chain constraints. Despite the Employment Index contracting in May and June, companies improved their progress on addressing moderate-term labor shortages.”

The final June S&P Global U.S. Manufacturing PMI Index was revised higher to 52.7, compared to estimates calling for an unrevised 52.4 level. However, the index was below May’s reading of 57.0, with a reading above 50 denoting expansion. S&P Global’s report differs from the ISM as it surveys a more diverse range of companies regarding size.

S&P Global said, “The US manufacturing sector signaled subdued improvements in operating conditions during June. The headline PMI dropped to its lowest level since July 2020 amid a near-stagnation of factory output and a fall in new orders. The decrease in sales was the first since May 2020, with domestic and foreign client demand falling. As a result, firms utilized their current holdings of inputs and finished goods to supplement production, with input buying stagnating and supply chain delays easing. A reduction in new orders, combined with a sustained rise in employment led to greater success clearing backlogs of work, which increased at a notably weaker pace.”

Construction spending dipped 0.1% month-over-month (m/m) in May, versus projections of a 0.4% gain and compared to April’s upwardly-revised 0.8% rise. Residential spending rose 0.2%, while non-residential spending decreased 0.6%.

Treasuries were higher with yields choppy with the Fed aggressively tightening policy amid the backdrop of a slowing economy. The yield on the 2-year Treasury note was down 10 basis points (bps) to 2.83%, the yield on the 10-year note decreased 8 bps to 2.89%, while the 30-year bond rate lost 1 bp to 3.12%.

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